##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-10877
 TERRA NITROGEN COMPANY, L.P.
  Delaware
    
    73-1389684(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)Terra Centre 
PO Box 6000, 600 Fourth StreetSioux City, Iowa
(Address of principal executive office)
    
    51102-6000
(Zip Code)
 Registrants telephone number:
(712) 277-1340
 Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. þ Yes o No
 Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
 o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
 Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). o Yes þ No
 At the close of business on July 27, 2007 there were 18,501,576 Common Units and 184,072 Class B
Common Units outstanding.




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TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statements of Partners Capital
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Management Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19Part II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 1A.
    
    Risk Factors
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3.
    
    Defaults upon Senior Securities
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits
    
    
    22Exhibit 31.1Exhibit 31.2Exhibit 32




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED BALANCE SHEETS
  unaudited
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    80,732
    
    
    $
    62,287
    
    
    $
    33,110Demand deposits with affiliate
    
    
    5,332
    
    
    
    2,457
    
    
    
    7,469Accounts receivable
    
    
    49,999
    
    
    
    37,676
    
    
    
    31,340Inventory
    
    
    22,542
    
    
    
    22,709
    
    
    
    27,362Prepaid expenses and other current assets
    
    
    2,471
    
    
    
    3,334
    
    
    
    1,350Total current assets
    
    
    161,076
    
    
    
    128,463
    
    
    
    100,631Property, plant and equipment, net
    
    
    72,250
    
    
    
    74,096
    
    
    
    75,125Other assets
    
    
    13,749
    
    
    
    15,655
    
    
    
    7,467Total assets
    
    $
    247,075
    
    
    $
    218,214
    
    
    $
    183,223LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    47,481
    
    
    $
    38,342
    
    
    $
    24,456Customer prepayments
    
    
    16,846
    
    
    
    35,326
    
    
    
    7,138Total current liabilities
    
    
    64,327
    
    
    
    73,668
    
    
    
    31,594Other long-term liabilities
    
    
    1,815
    
    
    
    474
    
    
    
    289Total liabilities
    
    
    66,142
    
    
    
    74,142
    
    
    
    31,883Partners capital:Limited partners interests, 18,502 Common Units
and 184 Class B Common Units authorized and
outstanding
    
    
    204,785
    
    
    
    160,795
    
    
    
    165,731General partners interest, 5 Master Limited
Partner Units authorized and outstanding
    
    
    (10,099
    )
    
    
    (10,544
    )
    
    
    (10,495
    )Accumulated other comprehensive loss
    
    
    (13,753
    )
    
    
    (6,179
    )
    
    
    (3,896
    )Total partners capital
    
    
    180,933
    
    
    
    144,072
    
    
    
    151,340Total liabilities and partners capital
    
    $
    247,075
    
    
    $
    218,214
    
    
    $
    183,223
   3




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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  (unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    177,158
    
    
    $
    119,109
    
    
    $
    305,010
    
    
    $
    214,587Other
    
    
    282
    
    
    
    42
    
    
    
    587
    
    
    
    21Total revenues
    
    
    177,440
    
    
    
    119,151
    
    
    
    305,597
    
    
    
    214,608Cost of goods sold
    
    
    114,111
    
    
    
    100,105
    
    
    
    204,881
    
    
    
    196,215Gross profit
    
    
    63,329
    
    
    
    19,046
    
    
    
    100,716
    
    
    
    18,393Operating expenses
    
    
    7,470
    
    
    
    2,027
    
    
    
    10,648
    
    
    
    4,065Operating income
    
    
    55,859
    
    
    
    17,019
    
    
    
    90,068
    
    
    
    14,328Interest expense
    
    
    (114
    )
    
    
    (110
    )
    
    
    (226
    )
    
    
    (219
    )Interest income
    
    
    1,312
    
    
    
    456
    
    
    
    2,545
    
    
    
    819Net income
    
    $
    57,057
    
    
    $
    17,365
    
    
    $
    92,387
    
    
    $
    14,928Net income allocable to
limited partners interest
    
    $
    56,486
    
    
    $
    17,191
    
    
    $
    91,463
    
    
    $
    14,779Net income per limited
partnership unit
    
    $
    3.02
    
    
    $
    0.92
    
    
    $
    4.90
    
    
    $
    0.79
   4




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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  (unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Operating activities:Net income
    
    $
    92,387
    
    
    $
    14,928Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    7,619
    
    
    
    6,668Non-cash (gain) loss on derivative instruments
    
    
    (342
    )
    
    
    333Changes in operating assets and liabilities:Receivables
    
    
    (12,323
    )
    
    
    748Inventories
    
    
    167
    
    
    
    (630
    )Accounts payable, accrued liabilities and
customer prepayments
    
    
    (16,188
    )
    
    
    (18,631
    )Other assets and liabilities
    
    
    1,909
    
    
    
    6,887Net cash flows from operating activities
    
    
    73,229
    
    
    
    10,303Investing activities:Capital expenditures
    
    
    (2,900
    )
    
    
    (3,426
    )Plant turnaround expenditures
    
    
    (1,057
    )
    
    
    (282
    )Change in demand deposits with affiliate
    
    
    (2,875
    )
    
    
    19,036Net cash flows from investing activities
    
    
    (6,832
    )
    
    
    15,328Financing activities:Partnership distributions paid
    
    
    (47,952
    )
    
    
    Repayment of long-term debt
and capital lease obligations
    
    
    
    
    
    
    (12
    )Net cash flows used in financing activities
    
    
    (47,952
    )
    
    
    (12
    )Net increase in cash and cash equivalents
    
    
    18,445
    
    
    
    25,619Cash and cash equivalents at beginning of year
    
    
    62,287
    
    
    
    7,491Cash and cash equivalents at end of period
    
    $
    80,732
    
    
    $
    33,110Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    64
    
    
    $
    126
   5




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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
  (unaudited)
 AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Interests
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2007
    
    $
    160,795
    
    
    $
    (10,544
    )
    
    $
    (6,179
    )
    
    $
    144,072Net income
    
    
    91,463
    
    
    
    924
    
    
    
    
    
    
    
    92,387
    
    
    $
    92,387Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    (7,574
    )
    
    
    (7,574
    )
    
    
    (7,574
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    84,813Distributions
    
    
    (47,473
    )
    
    
    (479
    )
    
    
    
    
    
    
    (47,952
    )Partners capital at June 30 ,2007
    
    $
    204,785
    
    
    $
    (10,099
    )
    
    $
    (13,753
    )
    
    $
    180,933Limited partner units issued and
outstanding at June 30, 2007:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at June 30, 2007
    
    
    
    
    
    
    
    
    
    
    18,685,648
 AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Interests
    
    
    Interest
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2006
    
    $
    150,952
    
    
    $
    (10,644
    )
    
    $
    (5,949
    )
    
    $
    134,359Net income
    
    
    14,779
    
    
    
    149
    
    
    
    
    
    
    
    14,928
    
    
    $
    14,928Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    2,053
    
    
    
    2,053
    
    
    
    2,053Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,981Partners capital at June 30, 2006
    
    $
    165,731
    
    
    $
    (10,495
    )
    
    $
    (3,896
    )
    
    $
    151,340Limited partner units issued and
outstanding June 30, 2006:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at June 30, 2006
    
    
    
    
    
    
    
    
    
    
    18,685,648
   6




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TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Financial Statement Presentation
 Basis of Presentation
   Derivatives and Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities,
  Revenue Recognition
   7




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Cost of Sales
  Inventories
    Impairment of Long-Lived Assets
  Natural Gas Futures, Swaps, Options and Basis Swaps
   8




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Cash and Cash Equivalents
  Demand Deposits with Affiliate
  Use of Estimates in Preparation of the Financial Statements
  2.
    
    Agreement of Limited Partnership
    Incremental Distribution
    
    Percentage of Incremental Distributionper Common Unit
    
    to General PartnerLess than $0.715
    
    
    1
    %$0.715-$0.825
    
    
    15
    %$0.825-$1.045
    
    
    25
    %Greater than $1.045
    
    
    50
    %
  9




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3.
    
    Net Income per Limited Partnership Unit
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands, except share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Basic income (loss) per limited Partnership
unit computation:Net income allocable to limited
Partners interest
    
    $
    56,486
    
    
    $
    17,191
    
    
    $
    91,463
    
    
    $
    14,779Weighted average units outstanding
    
    
    18,686
    
    
    
    18,686
    
    
    
    18,686
    
    
    
    18,686Net income per limited Partnership unit
    
    $
    3.02
    
    
    $
    0.92
    
    
    $
    4.90
    
    
    $
    0.79
   10




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4.
    
    Inventories
  June 30,
    
    
    December 31,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2006Materials and supplies
    
    $
    7,494
    
    
    $
    7,925
    
    
    $
    7,932Finished goods
    
    
    15,048
    
    
    
    14,784
    
    
    
    19,430Total
    
    $
    22,542
    
    
    $
    22,709
    
    
    $
    27,362
  5.
    
    Derivative Financial Instruments
    1.
    
    The item to be hedged must expose the Partnership to currency or price risk.2.
    
    It must be probable that the results of the hedge position substantially offset
the effects of currency or price changes on the hedged item (e.g., there is a high
correlation between the hedge position and changes in market value of the hedge item).3.
    
    The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
   11




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Other
    
    
    AccruedCurrent
    
    
    Current
    
    
    Net(in thousands)
    
    Assets
    
    
    Liabilities
    
    
    Asset (Liability)June 30, 2007
    
    $
    1,806
    
    
    $
    (14,898
    )
    
    $
    (13,092
    )December 31, 2006
    
    
    1,529
    
    
    
    (8,052
    )
    
    
    (6,523
    )June 30, 2006
    
    
    707
    
    
    
    (4,935
    )
    
    
    (4,228
    )
     12




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(in thousands)
    
    2007
    
    
    2006Beginning accumulated (loss)
    
    $
    (6,179
    )
    
    $
    (5,949
    )Reclassification into earnings
    
    
    276
    
    
    
    21,538Net change associated with current period hedging transactions
    
    
    (7,850
    )
    
    
    (19,485
    )Ending accumulated loss
    
    $
    (13,753
    )
    
    $
    (3,896
    )
   6.
    
    Revolving Credit Facility
  7.
    
    New Accounting Pronouncements
 , Fair Value Measurements,
  13




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The Fair Value Option for Financial Assets and Financial
Liabilities
  14




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Introduction
    Dependence on Terra Industries
   15




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Three months ended June 30, 2007 compared with
three months ended June 30, 2006
  2007
    
    
    2006Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)*
    
    
    (000 tons)
    
    
    ($/ton)*Ammonia
    
    
    95
    
    
    $
    382
    
    
    
    68
    
    
    $
    381UAN
    
    
    631
    
    
    $
    201
    
    
    
    571
    
    
    $
    141
    Six months ended June 30, 2007 compared with
six months ended June 30, 2006
  2007
    
    
    2006Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)*
    
    
    (000 tons)
    
    
    ($/ton)*Ammonia
    
    
    164
    
    
    $
    371
    
    
    
    120
    
    
    $
    394UAN
    
    
    1,205
    
    
    $
    181
    
    
    
    998
    
    
    $
    146
     16




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Capital resources and liquidity
        17




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Incremental Distribution
    
    Percentage of Incremental Distributionper Common Unit
    
    to General PartnerLess than $0.715
    
    
    1
    %$0.715-$0.825
    
    
    15
    %$0.825-$1.045
    
    
    25
    %Greater than $1.045
    
    
    50
    %
      18




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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
   
 ITEM 4.
    
    CONTROLS AND PROCEDURES
    19




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FORWARD LOOKING PRECAUTIONS
   20




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PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5.
    
    OTHER INFORMATION
   21




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ITEM 6.
    
    EXHIBITS
 (a)
    
    Exhibits:
 Exhibits *31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibits *31.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit *32
    
    Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
  SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN GP INC.as General PartnerBy:
    
    /s/ Francis G. MeyerFrancis G. MeyerVice President(Principal Accounting Officer)
   22